BILL ANALYSIS �
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|SENATE RULES COMMITTEE | SB 314|
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THIRD READING
Bill No: SB 314
Author: Vargas (D)
Amended: 5/17/11
Vote: 21
SENATE GOVERNANCE & FINANCE COMMITTEE : 9-0, 5/11/11
AYES: Wolk, Huff, DeSaulnier, Fuller, Hancock, Hernandez,
Kehoe, La Malfa, Liu
SUBJECT : Taxation: military housing
SOURCE : De Luz Family Housing, LLC
DIGEST : This bill extends the time period for assessors
to issue escape assessments on military housing projects.
ANALYSIS : Existing property tax law specifies that, for
purposes of the definition of a "taxable possessory
interest", a possession or use is not independent if it is
pursuant to a contract that includes, but is not limited
to, a long-term lease for the private construction,
renovation, rehabilitation, replacement, management, or
maintenance of housing for active duty military personnel
or their dependents, or both, if the housing units and the
private contractor constructing the housing meet specified
criteria. One of these criteria requires any reduction or,
if the amount of reduction is unknown the private
contractor's reasonable estimate of savings, in property
taxes on leased property used for "military housing", as
defined, inures solely to the benefit of the residents of
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the military housing through improvements.
Existing property tax law provides for escape assessments
to be made within four years after July 1 of the assessment
year in which the property escaped taxation or was
underassessed.
This bill provides that the county assessor may levy an
escape assessment on a military housing project within four
years after July 1st of the assessment year in which
property tax savings are withdrawn from a reserve account
when the military requires a reserve account for specified
use.
Background
Conflicts over whether possessory interest tax applies to
private military housing in California are as old as
private military housing in California itself. In 1955,
Congress authorized the Wherry Housing Program that used
private builders to construct the original De Luz homes,
which were subject to possessory interest taxes, bringing
forth a famous possessory interest tax lawsuit because of
the amount of tax due ( De Luz Homes, Inc. v. County of San
Diego , (1955) 45 Cal.2d 546). Congress subsequently
repurchased these homes beginning in 1957, until conveying
them to De Luz in 2000.
In 2004, the Legislature provided a safe harbor by enacting
specific conditions for military housing projects to meet
to qualify as not "independent," including that it is
constructed, renovated, rehabilitated, replaced, managed or
maintained for military personnel pursuant to a contract
(SB 451�Ducheny], Chapter 853, Statutes of 2004). To
maintain its designation as not "independent," the housing
must be situated at a military facility, under military
control, managed by private contractor, and constructed
according to military guidelines. SB 451 further required
that the military housing is considered not independent
only if the reduction of property taxes, or the private
contractor's estimate if that amount is unknown, on leased
property used for military housing "inures solely to the
benefit of the residents of the military housing through
improvements, such as a child care center, provided by the
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private contractor." If the foregone possessory interest
tax revenues do not inure solely to the benefit of the
residents, the safe harbor disappears, and the housing
project may be subject to the possessory interest tax.
Assessors levy escape assessments when an error or mistake
led to a property being under-assessed, or not assessed at
all. Upon discovering that a property "escaped"
assessment, the assessor determines the fair market value
of the property for the appropriate date, enters the
revised value on the property tax roll, and sends the
taxpayer escape assessments for all years within the
statute of limitations. The general statute of limitations
for escape assessments is four years.
Comments
The San Diego County Assessor and De Luz had a
long-standing disagreement regarding whether the De Luz
property was "independent" for purposes of assessing the
possessory interest tax. The assessor applied the tax
from 2001 to 2004; De Luz paid it, but appealed to the
assessment appeals board, who agreed with the Assessor.
After the Legislature enacted SB 451 (Ducheny, 2004), the
Assessor and De Luz continued to disagree regarding whether
De Luz had spent the foregone possessory interest taxes to
the benefit of the residents, thereby taking it out of the
safe harbor. According to the Assessor, the Assessor
applied a possessory interest tax from 2005 to 2008 for
approximately $520,000 per year. In 2009, the Assessor and
De Luz entered into an agreement specifying the future use
of the foregone possessory interest taxes. The Assessor
then cancelled the past taxes and revoked the imposition of
the possessory interest for the future.
SB 314 extends the statute of limitations for the Assessor
to levy an escape assessment to provide a longer time
period for the Assessor to enforce SB 451. De Luz argues
that the military requires the property tax savings along
with all moneys received after paying debt and operating
the project to flow into a reserve account, out of which De
Luz pays for improvements determined or permitted by the
military. The previous Assessor believed the property tax
savings had to be spent annually to benefit the residents;
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De Luz countered that they could only build what the
military told them to and could not spend the savings
annually because the military had not directed them to do
so. De Luz states that the military will ultimately
determine or permit use of the funds in the reserve
account, as they already have with a renovation project,
but at that point, the Assessor will only be able to issue
escape assessments for the four years preceding the
Assessor's determination that the fund's use did not
benefit the residents as required. Under SB 314, the
Assessor has four years from the time of the funds'
withdrawal to determine whether its use complies with
current law, and can issue escape assessments for all years
all the way back to when forgone taxes began accruing in
the reserve account.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No
Local: No
SUPPORT : (Verified 5/17/11)
De Luz Family Housing, LLC (source)
AGB:mw 5/18/11 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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